Buy, Sell, or Hold: InvenSense

Does the substantial potential here outweigh the risk?

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at InvenSense(NYSE:INVN) today, and see why you might want to buy, sell, or hold it.

Founded in 2003, headquartered in California, and sporting a market capitalization of about $800 million, InvenSense specializes in micro-electro-mechanical systems (MEMS) gyroscopes for motion tracking devices. So as you might guess, its products are housed in items such as smartphones, tablets, video cameras, portable navigation devices, and even wearable health monitors... and screwdrivers!

BuyThe first thing to like about the company is the company it keeps. It's supplying products that are proliferating rapidly -- very rapidly. InvenSense itself is also growing rapidly, recently being named the second-fastest growing semiconductor company in the Deloitte's Technology Fast 500, and the 40th-fastest growing company overall.

It's a leader in the motion-sensor market, ahead of others such as STMicroelectronics (NYSE:STM). Its technology is found in products such as Google(NASDAQ: GOOG) Android smartphones, which are selling briskly, and in Google's Nexus 7 tablet and Amazon.com's (NASDAQ:AMZN) Kindle Fire. STMicroelectronics' technology is in Samsung's Galaxy III smartphone and reportedly Apple(NASDAQ: AAPL) products, as well.

Then there's the company's future growth. One promising possibility is China, where InvenSense is pushing to grow. Right now Apple products aren't runaway winners there, which bodes well for InvenSense, but even if ultimate success is shared by Apple, Android, and Chinese products, that can be a good (and profitable) result.

Additional growth can come from installing its technology in other kinds of devices, such as via its recent foray into screwdrivers, via a partnership with Stanley Black & Decker(NYSE:SWK).

Its valuation is another draw, as this fast-growing company's P/E ratio was recently just in the 20s, and its forward P/E 12.7, below even the S&P 500's forward P/E. (Not every valuation number is compelling, though – its price-to-cash-flow ratio is a steeper 26, and price-to-sales a hefty 4.6.

The company's free cash flow, meanwhile, has taken a dip recently, but it's also in positive territory, which is better than at many young companies. And there's no long-term debt, also a good thing.

SellSell if you like long, solid track records. This is a young company, not a decade old yet, and with only about one year as a publicly traded enterprise. You might also sell if you can't handle volatility. The stock's one-year chart reveals progress much more jagged than smooth.

Uncertainty is another concern, as the company's CEO departed abruptly recently, seemingly at the request of the board of directors. The new guy may be great, but he's new. And why, exactly, did the previous CEO leave? That remains a mystery. Mysteries are great in books, but are sometimes not so great in the business world.

It's smart to remember, also, that the company is dependent on others. It experienced a hiccup earlier in the year, when some quality issues with Qualcomm(NASDAQ:QCOM) chips led to a temporary component shortage in new LTE smartphones. If Amazon.com tablets don't sell well, that could have an effect on InvenSense, as well -- and some speculate that Kindle Fire sales may be below expectations, due to Amazon recently discounting them.

And there are occasional legal issues to worry about, as well. One lawsuit over alleged patent infringement, filed by Wacoh, was recently dismissed. Another legal fracas remains, between InvenSense and STMocroelectronics.

Hold (off) Given the reasons to buy or sell InvenSense, it's not unreasonable to decide to just hold off on it. You might want to wait for it to post a few more quarters of strong results, and for its products to end up in more devices. You might wait for an even lower entry price, as well, though sometimes those never arrive.

The verdict I'm holding off on InvenSense for now, but I'm quite intrigued. It might well end up in my portfolio in the near future. But everyone's investment calculations are different. Do your own digging and see what you think. InvenSense may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian